Box 6. Recommendations concerning public-spending management

with a process that clearly defines political priorities and the means to achieve

them, and relies on multi-year spending targets rather than ad hoc decisions. There

is also room for enhancing near-term spending discipline. Although the introduction of “frame-budgeting” has improved planning and decision-making, its effectiveness has been undermined by the fact that expenditure targets have tended

to be modified in the parliamentary phase of the budget process. Moreover, fiscal

slippage has continued, with overspending (typically in the areas of compensation

and health care) systematically sanctioned by supplementary budgets.

With respect to the efficiency of public spending, much remains to be done

in the area of performance management. Most ministries have still to adopt performance-based budgeting. Moreover, managerial accountability has lagged the devolution of management authority to government agencies. This has contributed to

large wage increases following the introduction of a new decentralised public-sector

pay system. The devolution of responsibilities to local authorities has also not been

without problems, since they seem to have had greater difficulties in containing

costs than the central government, as it is harder for them to resist claims for more

public services and higher pay. And they have been even slower than the central

government in introducing performance management and other reforms. This is in

part due to their often microscopic size, highlighting the need for further amalgamation. Finally, there is scope for greater reliance on market mechanisms and signals,

such as outsourcing, user charges and client choice, in order to improve allocative

efficiency. Box 6 sets out some recommendations as to what could be the most

promising avenues of further reform in the area of public-spending management.

The proposals for building a power plant and smelter in eastern Iceland

are in part related to regional development goals: the population has become

increasingly concentrated in the capital region, and the government hopes to

increase the attractiveness of other areas. A range of other policies, including support to agriculture, also have important regional motivations. Agricultural distortions remain very large in Iceland, with producer support at the upper range of